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Confused about auto-enrolment versus salary sacrifice

neilio
neilio Posts: 286 Forumite
First Post First Anniversary Combo Breaker
in Auto-enrolment
What is the difference between auto-enrolment pension and salary sacrifice pension, in plain layman’s English please? I have been using https://www.thesalarycalculator.co.uk and I’m not sure if I’m on auto-enrolment or salary sacrifice. The two options give me very different results and it looks like I take home more money if I’m on auto-enrolment instead of salary sacrifice, but everywhere I read says salary sacrifice is a much better deal and people take home more money. So, I’m very confused.

I’ve just started a new job. Usually I am excellent at using salary calculators to figure out exactly how much money I’ll be taking home after various deductions, allowances, and so on; I love a good spreadsheet! I’ve had to be as I was previously an independent contractor for 4 years and spent two of those wanting to transition back into permanent so have been all over this when I was looking at jobs. I went back to permanent on PAYE last year but I have left that job to work somewhere else. But I have just realised I may have been calculating pension contributions incorrectly and I am worried that I will be earning less than I was before despite my salary increasing. I’m kicking myself for potentially not getting this right.

Comments

  • Paul_Herring
    Paul_Herring Posts: 7,481 Forumite
    Name Dropper Photogenic First Post First Anniversary
    Auto-enrollment is the general concept of (by default) having some of your salary/wages go into a pension fund.

    Salary-Sacrifice is one specific method by which those funds leave your wages.

    There are generally 3 ways of money getting into your pension fund:

    - Salary Sacrifice (AKA relief-at-source, and some other names) - the money is deducted before any income tax and national insurance calculations are performed, and that full amount goes into your pension fund. IT and NI are calculated on the remainder of your wage.

    - Net Pay - similar to salary sacrifice, only NI is deducted on the pre-deduction, IT on the post-deduction amount - the amount of wage (including what would have been deducted for IT on the amount contributed) goes into your pension fund.

    - Pay in out of net-pay (both NI and IT deducted on the full amount of your wage) - when it hits your pension fund, they re-add the IT that was deducted on the amount that went in.

    So, presuming a basic-rate taxpayer (20% income tax) on £24,000/yr (£2,000/month) wanting to contribute £100 per month

    - Salary sacrifice: £100 enters pension fund.
    You're taxed on the remaining £1,900 (£182.35 income tax, £143.76 national insurance)
    Net wage: £1,573.89 with £100 in your fund

    - Net-pay: £100 enters pension fund
    You're income-taxed on the remaining £1,900 (£182.32) but NI'd on the £2,000 (£155.76)
    Net wage: £1561.92 with £100 in your fund

    - Out of net wage: You put in £80, pension company adding the other £20
    You're income-taxed and NI'd on the full £2,000 (£202.35+£155.76)
    Net wage: £1,641.89-£80=£1,561.89, with £100 in your fund.

    (Calculations using/from https://listentotaxman.com/2000?time=12)
    Conjugating the verb 'to be":
    -o I am humble -o You are attention seeking -o She is Nadine Dorries
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